Korea avoids $216 mil. payment in final Lone Star ruling

Prime Minister Kim Min-seok, center, briefs reporters on Korea’s victory in its investor-state dispute settlement case against Lone Star at Government Complex Seoul, Tuesday. Justice Minister Jeong Seong-ho is seen on the right. Yonhap

The Korean government secured a victory in a protracted international arbitration, successfully nullifying a ruling in an investor-state dispute over the U.S. private equity firm Lone Star's sale of Korea Exchange Bank (KEB), ending a legal battle that has stretched on for more than a decade.

Prime Minister Kim Min-seok said Tuesday that the Korean government won a favorable ruling from the annulment committee of the World Bank’s International Centre for Settlement of Investment Disputes (ICSID) in Washington, D.C.

“The annulment committee has voided all payment obligations outlined in the Aug. 31, 2022, arbitration award, including the $216.5 million in principal and the interest owed to Lone Star,” Kim said.

Kim added that the government’s previously estimated compensation liability of roughly 400 billion won ($272.8 million) has been entirely nullified. The ruling also directs Lone Star to reimburse the government about 7.3 billion won in legal costs within 30 days.

In August 2022, ICSID ordered the Korean government to pay Lone Star $216.5 million, plus interest. The ruling after the U.S. private equity firm filed a claim in 2012 alleging that the Korean government had obstructed its 2007 plan to sell a controlling stake in KEB to HSBC by delaying regulatory approval. Lone Star contended that it then incurred losses totaling $4.68 billion.

Lone Star acquired a 51 percent stake in KEB for roughly $1.15 billion in 2003 and later sold it to Hana Financial Group in 2012 for about $3.5 billion, tripling its investment. The deal, however, was marred by controversies and legal disputes, including accusations that KEB had been sold at an undervalued price and allegations of stock manipulation involving the bank’s credit card unit.

Lone Star and its affiliate firms purchased large stakes in KEB and medium-sized builder Kukdong Engineering & Construction between 2002 and 2005, during a period when Korea was still grappling with the aftershocks of the 1997 Asian financial crisis.

The companies reaped substantial profits by selling some of the shares at higher prices a few years later, but paid lower taxes than Korean firms, citing a tax treaty between Korea and Belgium, where the investing company was based.

The National Tax Service (NTS) later launched an investigation into Lone Star and its affiliates, imposing taxes totaling roughly 800 billion won in 2007 on the grounds that the Texas-based firm effectively operated a permanent business presence in Korea. Lone Star subsequently filed a lawsuit seeking to cancel 173.3 billion won in corporate taxes and the Supreme Court ultimately ruled in its favor, rejecting the NTS’ claim that the company maintained a fixed business footing in the country.

Presidential office spokesperson Kang Yu-jung added, “We are gratified that these efforts have concluded successfully and we extend our gratitude to government officials, legal advisers and citizens whose trust and support were invaluable throughout this process.”